As was largely expected the US Federal Reserve kept the federal funds rate unchanged at 3.50-3.75%. The decision was approved by a 9-3 vote which was the largest dissent since 2019. Market interprets the overall policy statement reflects a hawkish tone. The FOMC has taken cognizance of the fact that economic activity continues to expand at a solid pace, while inflation remains elevated concurrently, partly reflecting energy-related supply shocks arising from the conflict in the Middle East. Fed Chair also emphasized that Fed would continue to assess incoming data and won’t be reluctant to act appropriately if required to bring the inflation back to its 2% goal.

However, in view of the lack of forward guidance from the Fed, a new trend started by Mr Kevin Warsh has increased the uncertainty in the market, and as a consequence, the 30-year yield rising to 5.23% – – 19-year high. Markets are now pricing in a 57% probability of a 25-bps rate hike at the Fed’s September meeting, according to the CME Fed Watch Tool.

In view of the Fed staying put with the existing rates in this meeting, perhaps it will give RBI’s MPC some additional breathing time to not prepone its rate hike decision in the forthcoming meeting to maintain the interest rate differential quotient.

Ajit Banerjee, President and Chief Investment Officer at Shriram Life Insurance